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CONTRACT COSTS
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9 Months Ended |
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Sep. 30, 2012
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| CONTRACT COSTS |
NOTE 5 – CONTRACT COSTS We define material, freight, equipment rental and sub-contractor services included in the direct costs of revenue associated with projects as pass-through costs. Since we use the percentage-of-completion accounting method to recognize revenue on construction contracts, by using a direct labor efforts expended method, pass-through costs have little or no impact in the determination of gross margin for a particular period. Pass-through costs as a percentage of revenue were 58.2% and 46.9% for the three-month periods ended September 30, 2012 and 2011, respectively. Pass-through costs as a percentage of revenue were 46.0% and 46.6% for the nine-month periods ended September 30, 2012 and 2011, respectively. At September 30, 2012, we recorded revenue totaling $1.7 million related to certain change orders on two projects which have been approved as to scope but not price. We expect to resolve these change orders in the fourth quarter of 2012. At September 30, 2012, we also recorded revenue totaling $6.6 million related to re-measure units and quantities on a unit rate contract that is in progress. We are in the process of negotiating the application of contractual unit rates to these quantities and expect to finalize these measurement packages in the fourth quarter of 2012 and first quarter of 2013. At September 30, 2011, we recorded revenue totaling $1.7 million related to certain change orders on two projects which were approved as to scope but not price. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. We recognized contract losses of $20.6 million and $1.8 million in the three-month periods ended September 30, 2012 and 2011, respectively, which resulted in an unfavorable reduction in gross margin during the periods of $26.8 million and $1.8 million, respectively, as required under the accounting for loss contracts under percentage of completion accounting. We recognized contract losses of $21.2 million and $2.4 million in the nine-month periods ended September 30, 2012 and 2011, respectively, which resulted in an unfavorable reduction in gross margin during the periods of $24.5 million and $2.4 million, respectively. The losses recognized in the three-month and nine-month periods ending September 30, 2012 were mainly due to the increase in estimated man-hours to complete one of our major deepwater contracts. These increased man-hours were primarily driven by revisions and delivery delays to specifications and designs by our customer in the third quarter of 2012 causing out-of-sequence work schedules to be used while executing the project. We have notified our customer of what we believe is our right to recover the costs and lost profits caused by these customer revisions and delays. The customer extended delivery of the first phase of the project as a result of these revisions and we are actively negotiating the recoverable amount with our customer. Any future deliverable delays or project revisions could result in future revisions to contract estimates and may be subject to our claim. No revenues for this claim have been recorded as of September 30, 2012. Any agreed upon recoverable amounts will be recorded in revenue in the periods when such agreement is reached between us and our customer. |